It’s only February and we’ve laid out quite a programme of work for 2015. Digesting the 4,000-page Christmas gift, curing the KYC sickness, cutting a trail through MiFID II and taming your global trading troubles – and we’re not yet at the midpoint of the first quarter. Sadly, it is not a blip – welcome to the reality of the next 5 years.
In our discussions with dozens of firms and a few regulators this year, we’ve had to answer a tough question: does anyone manage regulatory reform really well?
Sadly, upon reflection, the answer is ‘not yet’. While were encouraged by a number of top firms re-examining their ‘end-to-end’ regulatory management capabilities, the fact remains that the FS system is changing quickly and lots of perspectives need to get lined up today. This requires many unnatural acts in the capital markets – like reading large documents, sharing your views on footnotes, leaving the office to go to meetings and spending money on systems to manage the change.
Why? Well, consider that, for each paragraph of regulatory requirements, the interpretation of what it means differs in the eye of the beholder. Like English and American people speaking the same language that divides them, each firm has tribes that will focus on – and interpret – different meanings from the same set of words. Ergo, if your board wants a common interpretation, full understanding of the potential strategies to comply and the best path forward, you’ve got quite a job on your hands.
We’ve stepped back from the fray and looked at what it will take to do regulatory reform better and concluded that every paragraph of regulatory text can be read differently by the following 5 groups:
- Business tribe. Looks for nuances that could mean their market position is eroded or a competitor is weaker. Generally populated by the heads of the desks and the policy folks known as ‘regulatory affairs’. Tends to use the trade associations to agree positions – but only when they have to. Not overly concerned with 90% of the detail, they lock in on big picture opportunities and threats
- Legal tribe. Picks through every footnote, definition and potential bear-trap, clearing the way for a common understanding of what regulation means to the business flows. Doesn’t typically worry too much about sizing the change projects or working out the delta for business as usual
- Compliance, legal risk and op risk tribe. Stay with us – we’ve grouped these factions that don’t spend much time talking to one another because they are all concerned about the controls, the metrics and how the ‘second line of defence’ will be able to fulfil its duties. They do weigh into the decisions about how to manage the change, but from an ‘after the fact’ point of view
- Change tribe. Creates a general understanding of the overall ‘so what’ of the various regulatory change imperatives. Breaks down the tasks, sets priorities and makes sure the right groups know what they are meant to be working on. Sometimes populated with contractor members of this tribe who really need to sport a ‘been there, done that’ t-shirt
- Operations, data and IT tribe. Ok, we’re being a bit aggressive in calling this just one tribe, but it is where the vast majority of the cash is actually spent. Unfortunately, though they control billions in spend, 84% of their budgets are typically locked up in ‘run the bank’ and they are beholden to two masters: the business tribe, as they are the ones that will decide whether they get paid, and the pack of suppliers that product the kit that they rely on to get the job done.
Getting reform right means getting the tribes on the same page, quite literally. A good example was provided by a MiFID II conference we attended recently – this time looking at the issues for the energy markets. It would have been a fascinating study for anthropologists, if only they were able to work out what REMITs, CRDIVs and MiFID IIs were.
As usual, the conference was a bit light on attendees that actually do business – they were far too busy to come along. The legal tribe talked about their analytical journey through the various passages. Most could recite by heart the paragraphs that caused the most consternation.
The regulatory affairs spokespeople for the business tribe argued the many possible interpretations of the text. What was the potential impact on the business if you were exempt? Could one wriggle around the hedging definition? What precisely is a PPAT and how is it different from an OTF? Are inflation swaps commodities under the relevant MiFID II annex?
The compliance, change and operational tribes shifted about in their seats as they wondered which of the 2,076 pages of the CP they might have to go back and read again. The room chuckled when one operational tribe member asked the very European crowd what language MiFID II was written in. The smiles faded quickly as everyone immediately agreed that, whether you studied Spanish, French, Italian or English at school, you now have to learn MiFIDese too!
It all goes to prove that, if someone hasn’t understood the question, you’re not going to get a good answer. The secret to regulatory reform, therefore, is to get your many tribes moving at once to interpret the impact of each clause from their point of view. This is no mean feat given the sheer volume of regulatory reading which, by 2020, will by some calculations hit 300 million sheets of paper.
Not in a tribe yet? Better join one. Not tapped into the way your neighbouring tribe is looking at your issues? Better reach out and make friends quickly. Neither you nor your firm will benefit from sitting back and not engaging in the debates or creating the master checklist of what each tribe assesses the impact to be. With this much on the go, you need to be interacting, telling stories and meeting up around the campfire.
Of course, what quickly becomes evident is that both firms and their suppliers need a better regulatory change management capability. By this we mean having the whole firm able to annotate text, add their views, receive feedback via a workflow and have holistic reporting at their fingertips. When you’re ready, we would be happy to show how to do this.
This week we have unveiled how our JWG tribes will be using it for peer discussion of how to confront operational issues – have a look here. Let us know if you care to join our MiFID II group or participate in the KYC workshops and training on 24 February which are open to anyone who works in financial institutions.